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Economy

Incentives push up directors' earnings

Monday, 29 October 2007

Driven by ever increasing incentive payments, the average total earnings of FTSE 100 chief executives have doubled over the last five years to a new record of £3.2 million.

Their FTSE mid-250 counterparts have not lost either as average total earnings for the chief executives of these companies have gone up by more than 90 per cent since 2001/02 to £1.4 million, according to the newly published Directors’ Pay Report 2007 from Income Data Services (IDS).

As a result, it is not just institutional investors and the media taking issue with the current unprecedented levels of boardroom pay in the UK. A recent poll of pay experts, carried out by IDS in September 2007, found that over half thought that executive directors of public companies were overpaid and some two-thirds thought that pay differentials between the executive board and the rest of the workforce were too wide.

Morally offensive

Brendan Barber, General Secretary of the Trades Union Congress (TUC), said that the salary survey showed that Britain's top directors clearly have no shame.

"Year in, year out they have been paying themselves far bigger rises than they are prepared to pay their staff while lecturing the rest of us on the need for low taxes. It beggars belief that they are somehow working twice as hard as five years ago.It is time the rest of us gave a big raspberry to all their hand-wringing excuses of needing the incentives and matching the international going rate. It would at least be honest if they say they paid themselves these rises because they can."

"This is not just morally offensive greed, it is bad for the rest of society too. The growth of a new class of the super-rich, semi-detached from the rest of society, hits social cohesion, feeds into house price inflation and harms staff loyalty and commitment."

Increase

The Directors’ Pay Report 2007 further shows that FTSE 350 directors’ salary increases also outpaced those received by shopfloor employees. Over the last year, the salaries of top directors went up by an average 9.3 per cent, while IDS Pay Databank figures show wage settlements across the economy as a whole were running at 3.5 per cent over a similar period.

FTSE 100 chief executives’ incentives, when measured as a proportion of total earnings, have risen from 38.6 per cent in 2000 to 60.5 per cent in 2007. The average annual bonus payments for FTSE 100 chief executives have increased since 2000 from 49.1 per cent of salary, or £233,000, whereas today an identical calculation shows that they are worth 100 per cent of salary, or £786,000.

If salary and bonuses are taken together, average increases in total cash for directors in the FTSE 100 were running at 16.3 per cent and in the mid-250 at 21.5 per cent.

Average share option gains for FTSE 100 chief executives were worth just over £2 million in 2006/07, while LTIP awards averaged £1.4 million. Share option profits made by mid-250 chief executives 2006/07 averaged £1.1 million, while LTIP awards averaged £720,897.

A summary of the salary and total earnings levels of FTSE 100 and mid-250 executive directors is shown below:

FTSE 350 average pay in 2006/07

	Salary £pa	Total earnings* £pa
FTSE 100
Chief executive	737,537	3,174,863
Finance director	446,370	1,598,397
Other director	432,524	1,704,854

FTSE mid-250
Chief executive	410,694	1,432,622
Finance director	268,188	826,641
Other director	248,524	948,465
* total earnings include long-term incentive payments and notional gains made on the exercise of share options.

Total cash increases of FTSE 350 directors by rank and position 2006/07

	Median %	Mean %
FTSE 100
Lead executive	15.3	16.1
Finance director	12.5	19.8
Other director	9.8	14.6
All FTSE 100	11.6	16.3
FTSE mid-250
Lead executive	13.3	27.2
Finance director	14.1	18.3
Other director	11.1	19.9
All mid-250	12.7	21.5
* total earnings include long-term incentive payments and notional gains made on the exercise of share options.

Steve Tatton, editor of the IDS Executive Compensation Review and one of the reports authors commented: “It is no surprise that the earnings of top directors continue to escalate given what’s been happening to incentive scheme design. The potential maximum awards from all types of incentive scheme, bonus, share option and other long-term incentives have all been edging up and the rewards are being received today. What passed for maximum performance five years ago now passes for on-target levels of achievement.”

A comprehensive picture of boardroom earnings is given in the Directors’ Pay Report 2007 which analyses the salaries, annual bonus payments and long-term incentive plans of over 1,000 executive directors of Britain’s top 350 listed companies. This is the ninth successive survey published by IDS, with data drawn from annual accounts with financial years ending during the 12 months to June 2007.

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